Dividend tax - rates and thresholds 2022/23

How much tax will I pay on my dividends? A limited company must pay Corporation Tax on its taxable profits (19% in 2022/23). It does not pay any tax on dividend payments it makes to shareholders. The first £2,000 of annual dividend payments shareholders receive are tax-free.

Dividend payments might be perplexing, especially when they are taxed at a different rate than your other income. We define dividends, who can get them, and what you need to know about dividend tax.

What is a dividend?

A dividend is a sum of money paid out by a limited corporation to a shareholder who holds shares in the company. Dividend tax is levied at a rate determined by HMRC on all dividend payments received. Dividend income is taxed at 0% for the first £2,000 earned, regardless of additional non-dividend income.

Dividends are often a tax-efficient way to withdraw funds from a limited corporation. Dividends are paid to shareholders from the profits that remain after subtracting the amount owed for Corporation Tax. Dividends handed out cannot equal greater than the company's profits in the current or preceding fiscal years.

Who can receive a dividend payment?

Anyone who owns a share in the company is eligible to receive a dividend payment in proportion to the number (and kind) of shares they own. Shareholders may be firm investors, but they may also be employees, directors, or their families.

Because it is more tax effective, directors frequently pay themselves a little salary as well as dividend distributions.

How are small limited company dividends paid?

To pay a dividend, you must "conduct a directors' meeting to 'declare' the dividend and keep minutes of the meeting, even if you're the only director," according to HMRC instructions.

A dividend voucher must be generated for each dividend payment made, indicating the date, firm name, names of shareholders receiving a dividend, and amount of the dividend payment. The beneficiary should be given a copy of the dividend voucher, and the corporation should keep a copy for its records.

You must be aware! If you can't verify that money received to you from a firm you own is a share dividend, HMRC may argue that it's a salary payment and should be taxed as such, thus increasing your tax burden.

How much tax will I pay on my dividends?

The amount of tax you pay on dividends is determined by your total income and how much of that income is directly from dividend payments. The good news is that you will not be required to pay National Insurance contributions on your dividend payments. You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax). You also get a dividend allowance each year.

Tax band

The tax rate on dividends over the allowance 2022/2023

Higher rate 33.75%

Additional rate 39.35%

Basic rate 8.75%

Tax allowances and dividend income

You can use both the Personal Allowance and the Dividend Allowance.

The 2022/23 Personal Allowance

The tax-free Personal Allowance is the amount of money you can make before you have to start paying income tax. The tax-free Personal Allowance in 2022/23 is £12,570. If the dividends you receive are within your Allowance, you will not have to pay tax on them if you do not receive any other income.

The 2022/23 Dividend Allowance

In addition to the Personal Allowance, there is a tax-free allowance for dividend income. This means you might earn up to £12,570 before beginning to pay tax on profits up to the Dividend Allowance. The tax-free dividend allowance in 2022/23 is £2,000. If your dividend payments exceed your Personal Allowance and your Dividend Allowance, you will pay tax only on the portion of your earnings exceeding the thresholds.

Who is entitled to receive dividends?

Dividends are regular payments of profit made to investors who own a company's stock. Not all stocks pay dividends If you buy a stock on or after the ex-dividend date, you will not receive the following dividend payment. Instead, the dividend is paid to the seller. If you buy before the ex-dividend date, you will receive the dividend.

How much is the dividend tax in 2022/23?

The dividend tax rate you pay is determined by the tax band into which you fall after combining your entire dividend income to any other income you receive. Because tax is calculated in bands (similar to a stack of bricks), you may pay various rates of tax in each band. The tables below show the tax bands for 2021/22 and 2022/23, as well as the dividend tax rate for each band in each year.

To determine which band you belong to, combine your total annual income (including dividends). Because of the new Health and Social Care Levy, the dividend tax rate in 2022/23 is greater than in 2021/22.

2022/23 Dividend Tax Rates and Thresholds

Thresholds 2022/23

Dividend Tax Rate 2022/23

Personal Allowance: no tax paid on income in this band. £0 – £12,570 0%

Basic-rate taxpayers £12,571 – £50,270 8.75% on dividends earned above dividend allowance.

Higher-rate taxpayers £50,271 – £150,000 33.75%

Additional-rate taxpayers £150,001 upwards 39.35%

2021/22 Dividend Tax Rates and Thresholds

Thresholds 2021/22

Dividend Tax Rate 2021/22

Personal Allowance: no tax paid on income in this band. £0 – £12,570 0%

Basic-rate taxpayers £12,571 – £50,270 7.5% on dividends earned above dividend allowance.

Higher-rate taxpayers £50,271 – £150,000 32.5%

Additional-rate taxpayers £150,001 upwards 38.1%

When and how do I pay myself dividends?

Dividends can be paid as frequently as you want; just remember to follow the rules. Even if you're the sole director, you must hold a directors' meeting to declare dividends every time you pay one. You will also need to keep meeting minutes. For each dividend payment, you must create a dividend voucher that includes the date, company name, shareholder names, and dividend amount. Use our free dividend voucher and Director's Minutes templates. The majority of firms pay quarterly dividends; however, others pay bi-annually or annually.

Which one is best taking a salary or paying myself in dividends?

If you are both a director and a shareholder in a limited business, you may be able to generate the most tax-efficient income by combining salary and dividends. There is no minimum remuneration for directors, so you can pay yourself as much or as little as you like. If this is your only source of income, the most usual approach is to pay yourself a salary up to the National Insurance threshold and pay any excess as a dividend.